Brazil’s inflation rate in June fell to the lowest level in nearly two years as economic growth falters in the face of the European debt crisis, opening room for the central bank to continue cutting interest rates.
Consumer prices, as measured by the benchmark IPCA index, rose 0.08 percent in June from a month earlier, the smallest jump since a 0.04 percent increase in August 2010, the government’s statistics agency said in Rio de Janeiro today. The median estimate from 48 economists surveyed by Bloomberg was for inflation of 0.13 percent. Prices in June rose 4.92 percent from a year earlier, the lowest annual increase since September 2010.
The deceleration coincides with diminished growth prospects for the second-biggest emerging market and suggests the central bank will continue cutting the benchmark rate after its meeting next week, when it will probably lower the Selic to 8 percent from the current 8.5 percent, said Luciano Rostagno, chief strategist for Banco WestLB do Brazil.
“The IPCA numbers create the possibility of cuts beyond the July meeting,” Rostagno said in a telephone interview from Sao Paulo. “It gives tranquility to the central bank to leave the door open to continue cutting in August. The Selic could go below 7.5 percent or even 7 percent by the end of the year.”
Brazil plans to maintain the pace of rate reductions at half-point intervals, a government official familiar with the bank’s deliberations said on July 4. Policy makers have lowered the Selic 400 basis points since August.
Brazil’s annual inflation has slowed from 7.31 percent in October 2011, while remaining above the central bank’s 4.5 percent target since September 2010. Central bank President Alexandre Tombini has repeatedly said inflation will converge to the target by year-end even as the government attempts to kick the economy into gear with stimulus spending, tax cuts and lower borrowing costs.
“The impact of the rate cuts will be a little delayed,” said Roberto Padovani, chief economist at Votorantim Ctvm Ltda, in a telephone interview from Sao Paulo. “Brazil will probably feel more inflationary pressure in 2013, when the economy gets going again.”
Three of nine consumer price categories experienced deflation in June, led by a 1.18 percent decline in transportation costs that reflected lower gasoline prices.
The yield on interest rate future contracts maturing in January 2014, the most traded in Sao Paulo today, fell three basis points, or 0.03 percentage point, to 7.88 percent at 11:26 a.m. local time. The real fell 1 percent to 2.0399 per U.S. dollar.
Brazil’s gross domestic product expanded 2.7 percent in 2011, down from 7.5 percent in 2010. Analysts have reduced their 2012 growth forecast for eight straight weeks to 2.05 percent, according to the latest central bank survey.
President Dilma Rousseff’s administration has lowered taxes on consumer goods ranging from cars to home appliances to spark demand. When Petroleo Brasileiro SA, Brazil’s state-controlled oil company, announced price increases for gasoline and diesel last month, the government eliminated the so-called Cide tax on such fuels so consumers wouldn’t pay more at the pump.
“These measures are useful at the margin, as we saw in terms of what’s happening in cars,” said Tony Volpon, Nomura Securities’ managing director and head of emerging markets research for the Americas, in a telephone interview from New York on July 5. “Car sales are rising. But the measures are insufficient by themselves to take Brazil growth this year above 2 percent.”
Brazil’s industrial production fell in May for a third month, as weakening global demand offset gains from a weaker currency. The real has fallen 10 percent against the dollar in the past three months, the most among 16 major currencies tracked by Bloomberg.
As the government has tried to boost domestic demand, a rising consumer loan default rate has raised concern that Brazil’s credit-driven growth model could be running out of steam.
The consumer default rate in May rose to a 30-month high in May, reaching 8 percent, up from a revised 7.8 percent in April. Confidence among businesses in the retail sector fell 3.7 percent in the three months ending in June from the year before, after declining in May by 2.4 percent, according to figures published by the Getulio Vargas Foundation.
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